Monday, May 30, 2011

Oh, no! The Debt.

In the current year the Federal government takes in $2.5 trillion. But it spends $3.6 trillion. It must borrow $1.1 trillion on top of the $14 trillion we owe already.

Let's put that in terms we can understand. John and Jane Doe take home $ 50,000.00 a year. But they spend $ 70,000.00. So they will need to borrow $ 20,000.00 this year. They have been living beyond their means for a number of years and as a consequence owe $200,000.00 on their house, their cars, their home surround entertainment system, their clothing, their riding lawn mower and much, much else.

Where will they be able to borrow $20,000.00 this year? No reasonable banker or lender will give them a dime because they owe a lot more than they will ever be able to repay—unless they win big in the lottery.

Unless they cut their expenses drastically—say by about almost half or $ 20,000.00—they will face bankruptcy.

It is easier for the US government to borrow money than it is for John and Jane. But our government must also rein in spending, and it must reduce the deficit in the years to come.

There are a number of reasons for that:

It is unconscionable for us to leave the next generations of Americans with a debt of $14 trillion or more.

The deficit is due to irresponsible spending and the decline of the US economy. We earn and produce less. The government therefore takes in less money from taxes and thus needs to borrow more.

After World War II, the US emerged as “the leader of the free world.” A good deal of our preeminence derived from our powerhouse economy. But today that economy is ailing. We have exported our production jobs to other countries. We are unable to provide jobs for everyone—let alone jobs that pay a living wage.

At the same time, we owe ever larger amounts of money to foreign countries, especially China. We depend on other countries to keep our government afloat. That's not the position of a preeminent nation. If we are to remain a plausible big power, we need to learn to live within our income.

So the government faces two tasks: improve the economy and cut spending. Consider cutting spending first.

A quarter of our national expenditures go to the military. A significant amount goes to subsidies, for instance, to huge agribusiness or to the large oil companies.

A budget cutting plan passed by the House of Representatives will leave military expenditures untouched as well as subsidies for big corporations.

Others propose to make serious reductions in military expenditures and to reduce subsidies to wealthy corporations.

That sounds like a much better plan.

But wait! The military recruits heavily among poor youth who cannot afford college and who have no job prospects. If we reduce the size of the Armed Forces, will we increase unemployment?

If we cut back weapons procurement, what will happen to the people who now produce those weapons?

Exxon Mobil had one of its most profitable years and there has been a lot of talk about cutting its Federal subsidies. Will Exxon Mobil keep everybody on their payroll when subsidies are cut and thus their income shrinks?

Budget cutting is bound to cut jobs. It will reduce federal income from taxes and thus worsen the deficit.

When it comes to reducing government expenditures, we are facing a lose-lose situation.

But perhaps we can improve this debt situation by improving the economy. If more people have good jobs earning them a good income, the government will collect more taxes and will have to borrow less.

There are currently two proposals for improving the economy: cut taxes on the rich or have the government spend more (borrowed) money.

If we cut the taxes of the rich, the argument goes for the first strategy, they have more money to spend and that will create jobs to satisfy the needs of the rich for larger yachts or more pretentious homes. But what if the yachts are built in the Carribean and the building materials for larger castles come largely from the Far East. The tax cut may create new jobs, but there is no telling where those jobs will be created.

What if the rich spend their increased income on diamonds that keep the civil was in the Congo going? There will be continued rape and killing in Africa and no job creation at home.

When corporations find themselves with extra money due to tax cuts, they may buy up a competitor and thus contribute to the concentration of their economic power. Mergers often loose jobs when the two, previously separate companies now combined into one, eliminate jobs and lay of workers.

Tax cutting has quite unpredictable results. It is not at all certain that it will create jobs.

So we conclude that the government must spend its way out of its fiscal crisis. But we already owe more than $14 trillion. We have limited funds to spend on stimulating the economy.